Exercise 19-1 The Soma Inn is trying to determine its break-even point. The inn

Question

Exercise 19-1 The Soma Inn is trying to determine its break-even point. The inn has 75 rooms that are rented at $60 a night. Operating costs are as follows. Salaries Utilities Depreciation Maintenance Maid service Other costs $10,600 per month 2,400 per month 1,500 per month 800 per month 8 per roonm 34 per room Determine the inn's break-even point in (1) number of rented rooms per month and (2) dollars. 1. Break-even point in rooms 2. Break-even point 850 15300 If the inn plans on renting an average of 50 rooms per day (assuming a 30-day month), wh monthly margin of safety in dollars and (2) the margin of safety ratio? (Round ratio to o places, e.g. 10.) 1. Margin of safety 2. Margin of safety ratio Click if you would like to Show Work for this question: Open Show Work

Explanation / Answer

1. Break-even point (BEP) is the level of sales where a total of fixed and variable cost equals total revenues. It is calculated using following formula:

Breakeven Quantity = Total Fixed Cost / Contribution Per Unit

Here Fixed Costs = 10,600+2,400+1,500+800 = 15,300

Contribution Per Unit     = Selling Price Per Unit – Variable Cost Per Unit

= 60- 8 -34 = 18

So Breakeven Quantity = 15,300/18 = 850 room nights

Breakeven Sales = 850*60 = $51,000

2. Margin of Safety (MoS) is the difference between actual/budgeted sales and level of breakeven sales. If the inn plans to rent 50 rooms per day, then the monthly margin of safety will calculated be as follows:

Actual/Budgeted Sales = 50 rooms*30 days*$60 per day = $90,000

Breakeven Sales(as calculated above) = $51,000

Margin of Safety (MoS) = $90,000 - $51,000 = $39,000

Margin of Safety ratio is the ratio of Margin of Safety to Total Actual/Budgeted Sales. It is calculated with the following formula:

Margin of Safety ratio = Margin of Safety/Total Actual/Budgeted Sales

= 39,000/90,000

= 43.33%

It means that at the current level of sales and with the company's current prices and cost structure, a reduction in sales by 43.33%, would result in just breaking even.

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